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Sepracor Inc. (SEPR)

Q4 2006 Earnings Call

January 31, 2007 8:30 am ET

Executives

Timothy Barberich - Chairman and CEO

Jim O'Shea - President and COO

Mark Corrigan - EVP, R&D

David Southwell - EVP and CFO

Jonae Barnes - VP, IR and Corporate communications

Analysts

Greg Gilbert - Merrill Lynch

Richard Silver - Lehman Brothers

Marc Goodman - Credit Suisse

Matt Duffy - BDR Research

Larry Neibor - Robert W. Baird

Bill Tanner - Leerink Swann

Adam Greene - JP Morgan

Ian Sanderson - Cowen

Presentation

Operator

Welcome to Sepracor's Fourth Quarter and Full Year 2006 Earnings Call. Hosting the call today from Sepracor is Mr. Timothy Barberich, Chairman and Chief Executive Officer. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Mr. Timothy Barberich. Sir, you may begin.

Timothy Barberich

Thank you. Good morning. Thank you for joining us today for our fourth quarter and full year 2006 earnings webcast. With us this morning are Jim O'Shea, President and Chief Operating Officer; Dr. Mark Corrigan, EVP, R&D; David Southwell, Executive Vice President and Chief Financial Officer; Bob Scumaci, Executive Vice President, Finance and Administration; and Jonae Barnes, Vice President, Investor Relations and Corporate Communications.

Before we begin, I've asked Jonae to read the Safe Harbor statement. Jonae?

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Jonae Barnes

Various remarks that we make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the SEC Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors which are discussed in our most recent quarterly report on Form 10-Q which is on file with the SEC, and other reports that we file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today. While we may elect to update these forward-looking statements, we specifically disclaim any obligation to do so. Any forward-looking statement should not be relied upon as representing our estimates or views as of any date subsequent to today. Thank you, Tim.

Timothy Barberich

Thank you. Today as we present our results for the full year '06, it is helpful I think to step back a bit and review who we are as an organizations, how we performed over the past year, and where we are headed in the future?

Today Sepracor is truly a fully integrated pharmaceutical company addressing unmet needs, principally in the therapeutic categories of respiratory and CNS. We are one of the very few companies outside of big pharma with a critical mass presence in primary care, with the capability of discovering our own products, developing them through the commercialization, and creating major new brands supported by broad television and print campaigns. We have two major clinical assets addressing depression and other psychiatric disorders which continue to advance and several IND track CNS compounds emerging from discovery.

Our development and marketing infrastructure positions us well for both early and late stage in-licensing opportunities. And we are beginning to experience significant operating leverage as growth in revenues outpaces growth in expenses.

We have three major significant product franchises in the early part of their life cycle; XOPENEX, LUNESTA and now BROVANA. We continue to receive royalties on U.S. sales of CLARINEX and on ex-U.S. sales of ALLEGRA and XYZAL. And we expect to receive royalties on U.S. sales of XYZAL contingent on approval hopefully later in '07.

I would like to take a minute to look back on the achievements of '06, because I believe it was a very special year for the entire Sepracor team and our stakeholders. '06 was our first full year of operating profit, a significant milestone for any company and our first year with revenues in excess of $1 billion. During '06, we hired, trained and deployed an additional 450 rep expansion of our primary care sales organization, so that today we have 1750 reps in total promoting Sepracor's products.

We received FDA approval for BROVANA, the first nebulized formulation long-acting bronchodilator for treatment of COPD. We also presented important clinical results on the effect of LUNESTA in patients with coexisting insomnia and anxiety and corroborated the results we obtained earlier in patients with comorbid depression. We advanced our SNRI SEP-162 into the clinic and we continue to make clinical progress with SEP-289, our triple reuptake inhibitor.

We significantly expanded our discovery effort which is yielding promising leads for new treatments for anxiety, schizophrenia, cognition and neuropathic pain. A great year by any measure, but still one we would hope to surpass in '07. As you can see, over the past five years we have created significant momentum in sales with a compounded annual growth rate of nearly 50%. This growth in sales has enabled us to achieve profitability and will hopefully provide significant leverage going forward. And from a balance sheet point of view, shareholder equity is now positive.

Today, David Southwell will review the financial results of the quarter and provide guidance for the year. Jim O'Shea will review the progress of LUNESTA, XOPENEX and BROVANA brands and provide a review of commercial operations. Dr. Mark Corrigan will review R&D progress, and we will then open for Q&A session. I would like to turn it over to David, who will provide financial results for the quarter and year-end. David?

David Southwell

Thank you, Tim. For the three months ended December 31, 2006, our consolidated revenues were approximately $357.2 million of which revenues from Sepracor's pharmaceutical product sales were approximately $348.8 million. XOPENEX UDV revenues were $179.9 million, XOPENEX HFA brand levalbuterol tartrate Inhalation Aerosol MDI revenues were $20.9 million and LUNESTA revenues were $148 million.

Net income for the fourth quarter of 2006 was approximately $99.1 million or $0.85 per diluted share. Reported results for the fourth quarter of 2006 include charges of $13.8 million or $0.12 per diluted share for stock-based compensation due to Sepracor's adoption in January 2006 of SFAS 123R. These consolidated results compare with consolidated revenues of $311.1 million, of which revenues from pharmaceutical product sales were approximately $302.9 million, XOPENEX Inhalation Solution revenues were $146 million, and HFA revenues were $12 million, and LUNESTA revenues were $144.9 million, and a net income of $36.9 million or $0.31 per diluted share for the three months ended December 31, 2005.

For the year ended December 31, 2006, our consolidated revenues were $1,196.5 million. As Tim said, our first year over $1 billion, of which revenues from Sepracor's pharmaceutical products sales were approximately $1,162.8 million, XOPENEX Inhalation Solution revenues were $555 million, HFA revenues were $41 million, and LUNESTA revenues were $566.8 million.

Net income for the year ended December 31, 2006, was approximately $184.6 million or $1.60 per diluted share. Reported results for the full year 2006 include charges of $45.2 million or $0.39 per diluted share, for stock-based compensation due to SFAS 123R. These consolidated results compare with consolidated revenues in 2000 -- for the year ended December 31, 2005 of $820.9 million, of which pharmaceutical products sales were approximately $769.7 million. XOPENEX Inhalation Solution revenues were $428.5 million. XOPENEX HFA revenues were $12.0 million, and LUNESTA revenues were $329.2 million, and a net income of $3.9 million or $0.03 per diluted share, and again, that was for 2005.

As of December 31, 2006, Sepracor had approximately $1.166 million in cash and short and long-term investments. Sepracor expects to spend approximately $451 million, which consists of $11 million in interest and $440 in principal to repay all of its outstanding 5% convertible subordinated debentures when they come due on February 15, 2007. Jim?

Jim O'Shea

I think that's me, David. Thank you. Thank you, David, and good morning everyone. Third slide please. Overall revenues in the fourth quarter were $357 million or 14.8% on the fourth quarter '05, which brought the revenue for the full year to $1.197 billion or 45.8% on full year 2005, the principal drivers of sales being XOPENEX UDV and LUNESTA. Although, XOPENEX HFA MDI began to make a meaningful contribution.

On XOPENEX ended a strong quarter with the fourth quarter sales coming in at $180 million or 23.3% on fourth quarter '05, and which brought the full year sales to $555 million, up 29.4% on full year '05. XOPENEX sales throughout ‘06 have been supported by significant growth in the non-retail sector, particularly sales to Medicare and hospitals.

For reference, we finished the quarter with between 6 and 6.5 weeks of inventory at wholesalers and retail pharmacy.

In terms of scripts for the UDV, we saw a significant growth in volume throughout the quarter and we finished the quarter with a new Rx market share of 26.1% and a TRx market share of 26.7%.

At the doctor specialty level, we finished the quarter and the year with 46.1% market share with allergists, 31.1% market share with pediatricians, and with both, pulmonologists and primary care doctors increasing their market share to 33.9% and 20.4% respectively.

In hospitals, again good growth in the quarter and that we finished the year with a December market share of 34%, up 1.8% on December of '05.

Finally on XOPENEX UDV, a notable event this quarter was the decision by CMS to institute an NCD, National Coverage Determination on XOPENEX in COPD. The timeline and events are being illustrated in this slide. The timeline for the first phase in this process is already being completed, as the public commented, and we look forward to working with CMS to ensure the appropriate assets to XOPENEX for Medicare patients.

Overall for the quarter and indeed for the year, we think it was a very good performance for XOPENEX UDV.

On XOPENEX HFA MDI, further progression in sale and market share this quarter.

On sale, we completed the year with fourth quarter sales of $21 million, bringing the year sales to $41 million. At the prescript level we saw encouraging volume growth progressing throughout the fourth quarter and we finished the year with a December new Rx market share of 4.8% and TRx market share of 3.9% of the MDI market.

Also, during the fourth quarter we saw further evidence of increasing CFC HFA conversion in the market, which we believe endorses on our strategy of focus on strong formulary position and access and leveraging on our unique product profile with XOPENEX and strength at the physician level. We see this strategy gain momentum progressively throughout this year and into 2008 with a further conversion of the market through HFAs.

On BROVANA, the third addition to our respiratory portfolio, a brief update, an extensive was given last quarter by [John Symonds], Head of Respiratory Marketing. As John indicated, we believe with BROVANA we have a significant opportunity in the market which is of considerable size, 24 million patients with COPD and undervalued, and which has a clear need for a long-acting bronchodilator in the unique nebular form with low fast onset and 12-hour duration. Pre-launch activities have already started including the application for a J-Code and manufacturing activities are on track to support a second quarter launch.

As John said last quarter, we have a large and growing market, an important drug with unique benefits, and very importantly a well established experienced resurging sales force ready for a new addition to their detailed environment, truly an exciting prospect to look forward to.

I'd now like to turn to LUNESTA, and its fourth quarter's performance. LUNESTA's revenues in the fourth quarter were $148 million, which brought the sales of 2006, the first full year on the market of $567 million. For reference, we finished the year with around six and a half weeks of inventory at wholesale and retail pharmacies.

The promotional activities in the fourth quarter kept a year of intense efforts aimed at both physicians, patients, and consumers; as illustrated on this slide on the healthcare professional front, over 2 million details will be delivered, a significant sampling supported by over 1.5 million direct mail pieces, more than 400,000 reprints distributed and a wide reaching medical education program.

On the patient and consumer side, an extensive award winning DTC campaign, which delivered over 20 billion impressions, producing extremely high awareness of LUNESTA. It is actually very difficult to ignore the Luna Moth in 2006. This intense activity was also ducktailed with a very effective web-based educational information program, with almost 2 million registrations to-date, which we leveraged very effectively during '06, and we will expand in '07.

This very high activity has produced already over 300,000 unique LUNESTA prescribers since launch, with over 1800 new prescribers been added each week during 2006. Also by the end of 2006 over 10 million prescriptions have been written since launch with October, November, and December representing the three highest months since launch. For reference, the refill rate in December was 45.1 and the tablet prescripts were 29.7.

The prescription share momentum in the fourth quarter resulted in market share gains in the quarter, with a fourth quarter new Rx market share of 14.4% and the TRx market share of 13.8 % throughout the quarter. At a weekly level, although we gained market share across the quarter, we did see similar to last year some fall of the market share around the holiday period, inline with the low period and representative an overall promotional activity, DTC etcetera. We are now back fully in the field and with a high overall promotion and we are already returning to market share growth.

In terms of Managed Care Access, LUNESTA's overall position improved significantly all the way through 2006 with Tier 2 places nearly quadrupling during '06.

Versus AMBIEN CR in December, LUNESTA's Managed Care Access was at parity with AMBIEN CR in the commercial [market].

However, significantly in terms of Part D access, which represents a very important segment of the Managed Care Market of sedative hypnotic, LUNESTA has over twice as many Tier 2 positions and fewer off positions compared to AMBIEN CR, an encouraging picture going into 2007.

Finally on LUNESTA, significant growth in the sedative hypnotic market continued in the fourth quarter, with a 12% growth being seen over fourth quarter, which contributed to the 17.1% growth for 2006 over 2005.

With that brief update, I would now like to handover to Dr. Mark Corrigan.

Mark Corrigan

Thank you, Jim. 2006 was a great year for Sepracor R&D. The first-cycle approval for BROVANA represented the third approved NDA over the last three years. We continue to advance the state of knowledge concerning LUNESTA and the treatment of sleep disorders with ongoing presentations of our data in co-morbid conditions such as anxiety.

Outside United States, we conducted successful regulatory interaction in Japan and the EU. We completed Phase I on our novel anti-depressant Sep-289 and initiated Phase I and II reuptake inhibitor 162. Discovery research yielded two nominations of further triple reuptake inhibitors with differing binding ratios.

Finally, we successfully passed onsite FDA inspections of our stage reporting systems and GMP.

In 2007, R&D at Sepracor was facing its most varied and complex objectives to-date, working with increased budget headcounts, where a third of variable spends is driven by post-approval requirements in the wake of these three approvals. These cover the BROVANA, LUNESTA pediatric programs as well as XOPENEX activities.

For LUNESTA, we intend to file the EU-MAA or the European equivalent of NDA, with additional data from second six-month study, as well as incorporating the data from our trials in insomnia, with co-morbid depression and anxiety. We're advancing our clinical trials in Japan. We anticipate initiating proof-of-concept studies for 162 and 289 and we seek to start a regular flow of IND candidates from our research programs.

A glance at our discovery programs reveals our shift from isomer metabolite platform, retaining chemistry skills and capitalizing on preclinical and clinical development commercial capabilities. We target large growing markets with unmet medical needs, depression, schizophrenia, pain and anxiety. We have balanced our portfolio, selecting targets for known pharmacology means to therapeutics, such as monoamine reuptake program, the GABA 2 program and balance them with novel targets with high market potential and little less competition, such as the DAAO program and M1 program. Our goal from these programs is move to two to three INDs per year creating internal sustained [positive flow].

As described in our objectives for 2007, our clinical programs support the marketed products and for LUNESTA, as we embark on conducing a 700-patient trial, investigating the augmentation for potential for LUNESTA in combination with [rifaximin for the participation]. The study will be conducted in 15 European countries and will give the European scientific leaders, an opportunity to study LUNESTA. Concomitantly, we are preparing our regulatory submissions.

Advancing our Phase I assets, representing novel approaches to approaching the proof-of-concept stage, is the other major focus for our clinical group. Over to you, Dave.

David Southwell

Thank you, Mark. As usual, we are guiding to overall 2007 financials at this point. Let's start with revenues. LUNESTA's revenue guidance is approximately $685 million for 2007, of which the majority is likely to be in the second half in response to our promotional activities earlier in the year. XOPENEX's franchise revenue guidance is approximately also $685 million, of which the metered-dose inhaler is approximately $105 million and the unit-dose vial is about $580 million.

MDI revenues are also expected to grow towards the back half of the year as our share grows in response to the switch from CFC to non-CFC inhalers. BROVANA revenues are expected to be approximately $45 million for 2007, following the launch in the second quarter. Royalty revenues are expected to be about $40 million for a total revenue guidance for the year of approximately $1.46 million.

On the expense side, the selling, general and administrative expense guidance is about $830 million, which will be higher in the first half than the second, as we front-end load some of our promotional expense for the NASDAQ. Research and development is estimated to be $230 million for the year. Based on these revenue and earnings levels and a tax rate of approximately 5%, we are guiding to primary earnings per share of approximately $2.60 per share, based on weighted average shares outstanding for the year of 106 million shares. On a fully diluted share count of 121 million shares, this equates to EPS of approximately $2.25, given the weighting in SG&A investments to the first half of the year and the backend biased revenue, we expect a majority of these earnings to be realized in the second half.

Please note that these earnings are net of a non-cash expense associated with option expense of approximately $36 million, which is spread approximately evenly through the year. On the balance sheet side, we are anticipating a majority as we said at the beginning of the 5% debentures due February 15, 2007 which totals $440 million plus $11 million of accrued interest. Net of the maturity of these debentures, we expect to end the year with approximately $1 billion in cash and long and short-term investment. Jim.

Jim O'Shea

Thank you, David. We can now open the session for Q&A please.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions). Thank you. Your first question is coming from Greg Gilbert of Merrill Lynch. Please go ahead.

Greg Gilbert - Merrill Lynch

Thank. Good morning, I have two, first for Jim. What can you do to ensure that XOPENEX MDI share is consistent with your formulary positioning, it appears that there is a disconnect there. And secondly for Mark, what specifically will you look at, in proof-of-concept studies for any depressions to assess not only their approvability, but also their commercial viability and when might you have a better feel for a go or no-go decision for Phase III?

Jim O'Shea

I will take the first one, Greg. Good morning. I think clearly what he is saying in essence is how can we leverage? Obviously, we think an increasingly attractive formulary position, and the simple answer is we keep the epitome at the doctor level and at the patient level in terms of really taking the benefits of XOPENEX in the unique bronchodilator. So, we leverage the brand at the doctor level. We intend to significantly put resources at the rep level in front of the doctor, which clearly versus the other HFAs I think will distinguish it.

Mark Corrigan

Greg the -- this is Mark. One of the things about antidepressants is that there is a relatively long established sort of history about their degree of orthotripsy. So, we know that on average a two point improvement at Hamilton Depression Rating Scale is not only considered approvable, but generally sort of a standard that most antidepressants are at. So, with that kind of background, we're looking for proved efficacy as well as the safety profile, and we think that the additional pharmacology is the third of the [Dopamine], it gives us that opportunity. So, we'll be looking both at the efficacy. We are also going to be looking in some of the entry criteria ensuring that we have efficacy in severe patients of number of things that are going to basically build out a profile what we think is going to be commercially attractive. For the timing, we haven't really given out timing on yet on when we are going to hit that Phase III.

Greg Gilbert - Merrill Lynch

And a follow-up for Jim, the significant share changes that have occurred recently with the MDI products, presumably that's not a doctor level issue but a pharmacy level one, do I have that right? And is there anything you need to do to ensure that prescriptions that are written for XOPENEX are actually to fill the XOPENEX?

Jim O'Shea

Right. I think you are reading the same as we are. I think the very short-term issue of acute shortages, I think the transition is occurring at the retail level. Greg, you are right there. Not so much in terms of the long-term effects that will really occur at the formulary position and at the doctor-patient interface, so at the retail level. And our data so far is that, when it could be written for XOPENEX is actually to fill I think virtually 90% of the time. So, there is no issue at the moment in terms of XOPENEX being converted to another brand. I think what we are looking at is the battles within the albuterol area in terms of shortages. When that actually I think sorts itself out in terms of HFA being the dominant brand out there, the impact and the affect of the retail will diminish and the real impact in terms of what will happen in the market will occur in terms of formulary position and in terms of the profile of the drug at the doctor's office.

Greg Gilbert - Merrill Lynch

Thanks. I'll get back in line.

Operator

Thank you. Your next question is coming from Richard Silver of Lehman Brothers. Please go ahead.

Richard Silver - Lehman Brothers

Good morning.

Timothy Barberich

Good morning.

Richard Silver - Lehman Brothers

Could you provide a little bit more insight on a DTC spending and what we should be expecting, not necessarily quantifying it, but at least how you are looking at the year in terms of when you would be spending more versus last? You did mentioned that the sales are certainly going to be more back-end loaded, but just again insight on -- and putting that spending into perspective relative to what we saw in 2006?

Timothy Barberich

Rich, we intentionally do not provide guidance on DTC spends for both competitive reasons and also because we just don't want to -- it's something that we don't want to spend a lot of money on it. We don't want to spend a lot of time discussing it. However, in terms of the spread through the year, Jim, may have something to say on that.

Jim O'Shea

In light of -- as you could imagine, Rich, I think this is clearly a competitive issue. We really don't look behind in terms of the competition of where would the rating of our DTC. What you are looking at the moment though, I think you've seen on the TV is that we're going to be very aggressive in making sure our DTC spots are as effective as we possibly can. We're already seeing some new rollouts of the DTC program. And indeed, we will be doing that throughout the year as well making sure they are as effective as it possibly is. As you know, in 2006, we would -- I think the first and fourth, depending we have two campaigns in terms of the most -- in terms of awareness coming from our campaigns, we want to maintain that through '07.

Richard Silver - Lehman Brothers

Can you comment on the quarter with regard to inventory fluctuations versus rebating and discounting on LUNESTA?

Jim O'Shea

For second quarter or the--

Richard Silver - Lehman Brothers

The quarter that you reported today, the fourth quarter.

Jim O'Shea

Right.

Richard Silver - Lehman Brothers

Can you talk about where inventories were in the quarter relative to previous quarters?

Jim O'Shea

Yes, I can.

Richard Silver - Lehman Brothers

And then also, sort of level of rebating and discounting given that you did have a 9% price increase in the quarter?

Jim O'Shea

We did have a 9% increase about mid-November. So, the time for that to take effect obviously is pretty short. And I really don't want to be talking in specific. I think you can imagine in terms of the discount rebates that's something that we historically haven't done. In terms of the inventory, Rich, we ended the quarter with -- actually we ended the previous quarter around six weeks. We ended this quarter, the fourth quarter, around 6.5. And that's not unusual in terms of what happens around this Christmas period, when this -- we have actually have a week's shutdown in the company and the wholesalers tend to buy forward a little, so no appreciable difference in terms of inventory.

Richard Silver - Lehman Brothers

And can you talk about the Phase IIIB/IV program, something that you certainly spend quite a bit of time talking about two quarter -- two conference calls ago on the plan for really raising the profile of some of this additional data that you have and we haven't heard as much about that recently?

Jim O'Shea

That's true in fact. I think in many ways we kept our powder dry and this could be a very, very good year for it to come out, and indeed we -- our plan is to do that. The rollout of the Phase, pretty exciting data, as you know, the coexisting conditions in -- with depression, GAD, menopause, and RA. Our plan is to be rolling that out throughout the year and into next year, really in line with endorsing and enhancing the profile of LUNESTA. So wait and see, Rich.

Richard Silver - Lehman Brothers

And do you expect any changes at all in terms of your marketing strategy with AMBIEN going generic in April?

Jim O'Shea

Not really. As you could imagine, this is sort of an advertised fact and we've been looking at this for a long period of time, trying to look also in terms of what we can expect around the April period. And I think what we can expect is some disruption, and I think, historically, the analog show that you tend to get a little -- some disruption around when a major brand goes off patent. But historically, and the analog in concern is, it's really the brand that is affected, that is affected. The other brands pretty quickly carry on, as they did previously, certainly in terms of volume. What is interesting is when a major brand goes off patent, it intends to actually to draw new patients into the market, because there is old price braded product is out there, and what that does is clearly increase the switch component in the marketplace, and we intend, and I think we're clearly, we believe we have a distinctively preferable profile too, for example, AMBIEN. And in that situation, we actually see it as an opportunity. In terms of the actual tactics, you'll see that we're really maintaining the same level, overall level of promotion, as you see. We do continue -- want to be as aggressive as is sensible in managed care for formulary access, and we need to do that. And we do intend to enhance the clinical profile of the drug, as with rolling out the phase IIIB. So we have a sort of a multi-phase approach that we intend to roll out.

Richard Silver - Lehman Brothers

And one last one, do you expect inventory to remain stable on LUNESTA?

Jim O'Shea

Inventory, we actually believe over the year will probably come down somewhat.

Richard Silver - Lehman Brothers

Okay. Thank you.

Operator

Thank you. Your next question is coming from Marc Goodman of Credit Suisse. Please go ahead.

Marc Goodman - Credit Suisse

I'll just continue on this LUNESTA, so if you did 148 versus 141 last quarter, and you said that we went up a half a week, so that's -- what is that about 5 million. So, basically, flattish revenues, and yet your prescriptions were up, I don't know, 200 some odd thousand or something like that, whatever it was, I mean, that means the average pricing is coming down pretty significantly, can you talk about that, and what we should expect for average selling price? And that's question number one. And then question two, can you help frame the opportunity for LUNESTA outside of the United States? What's the opportunity in Japan and Europe and give us your best timelines for when we should expect those products to launch, and how to think about the economics to Sepracor?

Jim O'Shea

I will kickoff and may not be able to answer all of your questions, you can imagine. In terms of price, that's always a very difficult one. In that, the devil is in the detail. And the detail, basically, varies quarter-by-quarter depending on retrospective payments in terms of past positions with managed care. For example, it can do with marketing programs. It could even do to return some solid manufacturing. So, you've really got to be looking retail, as the retail [anomaly] price rise is over a year. It's never a bad idea to raise price. What you got to be doing there, it pertains into relationship to what's happening at a particular time. And indeed one of the key things is how the aggression you are having in terms of managed care. I am freely stated on the LUNESTA, we do intend it to be as sensibly aggressive as we possibly can on LUNESTA. We think it will actually bear clear fruit in terms of volume and market share growth. So, it really is specific and things happen in a quarter that may not happen in other quarters. Price rise, as you know, was only in mid-November, so I had very little time to kick in, but that's probably as far as I want to talk in terms of actual price.

Marc Goodman - Credit Suisse

What about the net prices, what I am talking about, was there some unusual returns, rebates to customers this quarter versus last quarter, that factored into the revenue line?

Jim O'Shea

There were differences in this quarter compared to other quarters, yes. And they were one-off.

Marc Goodman - Credit Suisse

Okay, I mean, were they significant, I mean when I look at the price per prescription, it looks like it's coming down from 85 to roughly 81 to roughly 76 in the past three quarters?

Jim O'Shea

Yeah, I really can't give any more detail, as you can imagine, Marc, in terms of price. I think I gave you the general outline in terms of what can happen generally and it will change quarter-to-quarter. And said in the fourth quarter, there were some one-offs actually did affect.

Marc Goodman - Credit Suisse

Okay. So, the fourth quarter is a little lower than steady state is what you are saying?

Mark Corrigan

I am, yes.

Marc Goodman - Credit Suisse

Okay.

Mark Corrigan

In terms of Japan and Europe, outcome in different terms and may about just stay with market, I won't say it must. We think a significant up-side in terms of the potential for LUNESTA x-US. I think clearly in Japan, we certainly are progressing the aspect of trying to leverage the LUNESTA in Japan, and indeed if you look at the uptake of AMBIEN in Japan, it is actually one of the fastest growing products out there, and we do see LUNESTA would have a big impact over there. It would lead to a third-party not of those as you can imagine, the timing for Japan, and looking at markets probably 2010. In Europe --

Marc Goodman - Credit Suisse

How big is the market in Japan right now? Is it just AMBIEN? What else do they use over there?

Mark Corrigan

They use a multiple, while that being (inaudible) agents.

Timothy Barberich

So, (inaudible) is available over there of [XOPENEX] interestingly, its at a very high dosage, so its principally a psychiatric condition, but for the regulatory interest its relatively high in the lower doses as you might image for the Japanese. The overall, I think the, I can't comment on the overall market size, we believe that there is a significant potential for the product and one of the main reasons is that the market leader AMBIEN over there actually does not have any indication in psychiatrically comorbid conditions and our discussions with the regulatory agencies. They were very interested in our comorbid deal, in fact in our bridging program, we will include patients with co-morbid condition and we expect that to be a significant differentiating factor in lift for the promotions.

Mark Corrigan

And the impact of that Mark, obviously is -- as you can imagine in Europe, if we're talk in Europe, the big thing to be looking at it price, as you know. And I think the aspect of a differentiated level with our co-morbid data and it could be very, very important -- getting a very attractive price. Again we see this is being through a third party and the timing of this was probably in the time period of 2008, looking around to make sure I got that right, 2008. So, between the two, I think there is significant upside and we are aggressively pursing it.

Marc Goodman - Credit Suisse

The partnership discussions are ongoing for both areas right now?

Timothy Barberich

This is Tim. We can't really comment in much detail because you never really know where the finish line is, but it's heavily, our discussions are heavily influenced by the regulatory pathway in Europe and probably by mid-year we'll have a lot more clarity in terms of the regulatory assessment of LUNESTA and what the comparator is and so on, which will have a big impact on pricing. So, pricing, the likelihood of favorable pricing is what really dictates the timing on partnership.

Mark Corrigan

Is that okay Mark?

Marc Goodman - Credit Suisse

Thank you.

Operator

Thank you. You next question is coming from Matt Duffy from BDR Research. Please go ahead.

Matt Duffy - BDR Research

Good morning. Thanks for taking my question. A couple questions for Jim. What did share of voice do in the sleep market over the quarter?

Jim O'Shea

It was about -- it's virtually [combined]. Actually there's no significant change in terms of, if you look at previous quarters, it's virtually combined with Sanofi being the leader, in terms of share of voice, in terms of rep force. We were second and [Roxane] was somewhat below us but not too far.

Matt Duffy - BDR Research

Okay. And can you just fill us in on any change in the actual part. You actually gave the tearing share in the end of the year, but did that change over the previous couple of quarters?

Jim O'Shea

It has changed over the previous times, and it is now as you know, pretty attractive as I have shown you. I think the thing about Part-D as you know is that it has come from nowhere to actually I think it accounts for between 12% and 14% in terms of the part of the managed market in terms of the sedative hypnotic market and clearly you have deal with US, the high dominance, about I think 14% to 15% of total scripts in the sedative hypnotic market of over 65. So, you can put the two together. We being as aggressive as it's sensible there, and actually have got some very good positions. So it has changed very favorably.

Matt Duffy - BDR Research

Okay, great. And then one last thing for Jim or Mark or whoever might have some experience here. In terms of the national coverage assessments, is there a history there? Can you give us some insight in terms of the valuation that Medicare is going to go through and if there's -- what they have done with other drugs in the past and if therapeutic classes?

Jim O'Shea

I don't know, if it's different, there is not that many NCDs that you can look at. I think we have just gone through the common period as you know, and in fact we extended from the 19 to the 24. There was extended comment for the -- and in fact it can be, I think we can -- you can actually see what the comments are. They then will go in some ways behind closed doors to look at their own databases and indeed look at the comments and indeed previous discussions that we have had in others have had with them and then they composed the white paper in June, that's the common period and then initiation in September. So it's difficult to go in terms of analog.

Matt Duffy - BDR Research

Okay, very good. Thanks very much guys.

Operator

Thank you. Your next question is coming from Larry Neibor of Baird. Please go ahead.

Larry Neibor - Robert W. Baird

Thank you. Good morning. Can we revisit your XOPENEX MDI market share question again?

Mark Corrigan

Yes.

Larry Neibor - Robert W. Baird

Do you think that -- you are saying you have a very strong formulary position, but it looks to us like you are loosing quite a bit of share within the HFA segment. How do you intend to reverse that?

Jim O'Shea

I think it's in line with the view of what we think the market will unfold. I think you have got three -- the three [points] you are going to look at this market, one is retail assets, the other is managed care asset and the third is really and frankly is the patient and the doctored effect. I think at the moment, I think I said this to Greg, I think we are heavily in the aspect of acute shortage of CFCs and going over to HFA. That's likely to be chronic, as we all know, I think that's what we are seeing. It is a pretty [evasive] transition from CFC to HFA. At the moment that's really -- the main effect there is what's happening at the retail level and there you have the anomalies of one of the competitors basic being listed, as you know, that is an anomaly. And you also have the various aspects of loss. So very short-term it really is in the acute aspect of these patients needing to get their HFAs and the main impact of that and that is Albuterol, the main impact of that is at the resale level. Overtime when it flushes through and the market becomes HFA, which is a stabilized market, the two vectors that really affect usage will be managed care for new physicians and what the doctor believes he wants to write and what is best for the patient. And on the doctor level, I think, I have always said I think the unique profile of XOPENEX should have clear effect there. And we are obviously focusing on that talking about XOPENEX, trying to get in some ways not talking about the [can], we are talking about differentiation. The other brands are Albuterol, we are unique there, so we are focusing on that and increasingly I think that will take a tract. At the managed care level, what we are trying to do is get sensible meaning not give the product away, at a very little price, sensible physicians that we think we can leverage. What we need to do though is a managed care physician is only a third as what is written at the doctor level. It's [right if you] totally close plans that can force this issue. So overtime you need a two part attack, making sure that the doctor understands and endorses the product and wants to write it to the patients and making sure that its free access at the managed care level. And we are trying to do both, that's why I think David said that increasingly you see that's taking effect as we go throughout the year and into '08. So we see that's progressively taking effect.

Larry Neibor - Robert W. Baird

Okay, then second question on LUNESTA versus AMBIEN IR used to comment on the formulary status LUNESTA versus AMBIEN IR. Could you please remind us where that formulary status comparison is now?

Jim O'Shea

With AMBIEN IR you are talking of?

Larry Neibor - Robert W. Baird

Yes.

Jim O'Shea

Yes, our database indicates that almost 80% of AMBIEN is at Tier 2 and the rest 22% is at Tier 3. So, what you can see is managed care [position] us very, very nicely in terms of the de novo generic switch. So de novo mechanisms are applying, so you have got AMBIEN predominantly in Tier 2 then will be going into Tier 1.

Larry Neibor - Robert W. Baird

Great. Thank you.

Operator

Thank you. Your next question is coming from Bill Tanner of Leerink Swann. Please go ahead.

Bill Tanner - Leerink Swann

Thanks, just a maybe a follow-up question, Jim, for you on the NCD. Just wondering how the procedure or the process is different potentially than from the initial LCA. I guess, our understanding is at least for the LCA that it was really data from peer-reviewed publications and our understanding and, again correct me if we are wrong, is that with an NCD, there is more data published or unpublished that actually can be brought to support your case?

Jim O'Shea

My belief is that, Bill, I think that it's the whole body of events they will look at and all is from both published and unpublished and indeed opinion from patient groups, from pulmonologists and indeed we would like believe on ourselves as well, if they may -- a third-party. But they look at the whole body of evidence on the products.

Bill Tanner - Leerink Swann

And then to what extent I guess has the Sepracor's involvement was in this process? Was that different then initially? I mean, you guys have been submitting more data or what's the procedure?

Jim O'Shea

We've had a fairly continuous dialog with CMS, really trying to make sure that they understand the value of XOPENEX in both published, non-published and the data in its whole and that's really how we have attacked it in this last period.

Bill Tanner - Leerink Swann

Okay. Thank you.

Jim O'Shea

Thanks.

Operator

Thank you. Your next question is coming from Adam Greene of JP Morgan. Please go ahead.

Adam Greene - JP Morgan

Thanks. Good morning everyone.

David Southwell

Good morning.

Adam Greene - JP Morgan

First question for David, just hopefully you could provide some color around the operating expenses that you talked about, would it be higher in the first half of the year, any way to quantify that, is it a 70/30 split, 60/40?. I know you don't give quarterly guidance, but just I would be helpful in terms of the proportionality of expenses, first half versus second half. Then, following up -- a follow-up on Mark's question about Japan and LUNESTA, I was wondering if you could talk about the pricing environment? I was under impression that you're using LCA-type pricing environment there and that AMBIEN and ZOPICLONE are already on the market there for about a dollar a day, I was wondering if you have any comments on that?

David Southwell

Let me handle the first one by not handling it. We really don't want to go into a lot of detail on what we're doing quarter-by-quarter, partially because we don't want to be held for it. Sometimes we change the promotional expense. So, but what I said was standard, it's more likely to be higher in the beginning. Mark?

Mark Corrigan

I am going to just make one comment on them, one thing to bear in mind is the recent changes, the Japanese regulatory environment is shifting and recently it looks like there is eight years of exclusivity that's applied to the products and I know that while they are up every year for review, the lengthening of the exclusivity, I think is beneficial overall for the product revenues. And I'll let Jim make a comment on pricing.

Jim O'Shea

Yes. As you know, it tends to be a pretty complex process over there. But I think your analysis is spot on. I think looking at it a dollar day and the reference being AMBIEN is sort of the market we are looking at.

Adam Greene - JP Morgan

So, is that a fair - I mean, how do you get a premium price to that?

Jim O'Shea

You get a premium price by basically looking at -- it depends on how they want to take in terms of reference to the US price, or the European price. There is a formula they tend to use. But in the end they do reserve a multi-factorial formula that can include reference pricing, meaning either Europe or the US, and the reference stroke, and reference stroke being a $1. So, at the moment, I suppose we may be pessimistic, but we are anticipating the year-end (inaudible) dollar is probably, A; very realistic.

Adam Greene - JP Morgan

Thanks.

Timothy Barberich

We have time for one more question.

Operator

Thank you. Your final question is coming from Ian Sanderson of Cowen. Please go ahead.

Ian Sanderson - Cowen

Thanks for taking my question. A follow-up, and do not forget anything here, on the promotional spending guidance for 2007; is the first half loaded primarily because you tend to buy media time up front and then it is spent throughout the year. Is that what happened in 2006? So should we actually look for more even DTC promotional activity through the year, but the spending is front-end loaded, number one. And number two, what does the LUNESTA sales guidance incorporate in terms of a market growth assumption.

Timothy Barberich

Well let me handle the first one, I think I have already handled it twice actually. We just don't want to go in to details on the promotional expense period. A; in terms of the spend, which sometimes is front-end loaded and some times isn't, and B; in terms of the actually amount of media, the timing of the media that we do. In terms of the market growth assumptions, Jim may be you have an assessment on that.

Jim O'Shea

As you can imagine, we grew 17.1% in '06 and what's being still very high promotion in '07. So, we do see a growing market. But to be any more precise than that, I think would be wrong.

Ian Sanderson - Cowen

Thanks.

Operator

I'll now turn the floor back over to Timothy Barberich for any additional remarks.

Timothy Barberich

Thank you. Thank you for joining us this morning. We look forward to reporting our progress at the next earnings webcast. I'd like to mention that we will continue to display the slides of our webcast for the past four quarters including this on the Sepracor website, and thank you again.

Operator

Thank you. This does concludes today's teleconference. An audio replay of today's call will be available for one week starting today at 11 am Eastern Standard Time. The dial-in number is 973-341-3080 and the pin number is 8292745. Please disconnect your lines at this time and have a wonderful day.

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